Price of Petroleum

Geopolitics boost gold

PUBLISHED : Tuesday, 13 March, 2012, 12:00am
UPDATED : Tuesday, 13 March, 2012, 12:00am

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Gold prices have begun firming in the past month or so, after Israel began threatening to launch air strikes against Iran's nuclear facilities.

Western nations have slapped an oil embargo on Iran for suspected development of nuclear weapons. Equities markets in America, Europe and Asia have been spooked by this geopolitical development, with analysts and strategists talking of a gloomy scenario in the months ahead.

Gold on the other hand has started firming as a safe-heaven investment option. In an interesting development, Iran's central bank governor has said the country was willing to accept gold as payment for oil, bypassing the sanctions imposed by the United States and Europe.

Investment firm Threadneedle's chief investment officer, Mark Burgess, says that while some view this as potentially a significant source of demand, he believes the story is irrelevant in terms of its impact on gold.

As an academic exercise, however, the numbers are interesting. Assuming Iran exports two million barrels a day, at present oil prices, the value of one year's production is about US$90 billion.

This is equivalent to about 1,700 tonnes of gold, which itself represents a whopping 60 per cent of annual gold production. This is why gold insiders are touting the story as a bullish one for the metal.

Another factor affecting gold prices is that Kyrgyzstan's central bank is looking to increase its gold holding from 8 per cent to 12 per cent of foreign currency reserves. Gold will be purchased from Centerra's Kumtor mine, which makes up nearly 12 per cent of the country's GDP.

The central bank's buying - on a net basis - has been an important factor in bullion's recent performance. It looks likely that this trend will continue.

The year has started with moderately more appetite for risk across markets, supported by better than expected bond auctions in Europe.

However, there will no doubt be many twists and turns in the coming months and gold appears attractive as a hedge against many of these potential potholes, according to Burgess.

Long-term fundamentals appear supportive of prices, driven by constrained supply and rising demand. Gold equities continue to trade at attractive valuations on a number of metrics and appear poised for a rerating this year, Threadneedle says.